Strong Dollar Continues to Erode Dubai Property Sale Prices

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Today, Phidar Advisory released its Q1 end-quarter Dubai residential research note. The report shows that residential prices in the first quarter of 2015 continue to decline, compared to the previous quarter.

“The strong USD dollar continues to hit Dubai property prices, but apartment transaction volumes remain resilient” said Jesse Downs, Managing Director of Phidar Advisory. “The market downturn is attracting selective opportunistic investment.” she added.

Apartment lease rates decrease a nominal -0.3%, while sale prices decreased 3.9%, pushing yields up to 7.2%. Lease rates for single family homes, also referred to as villas, decreased 2.4% and sale prices decreased 3.0%, which pushed yields up to 5.7%.

In Q1-15, apartment transaction volumes were up 0.6% compared to the same period in 2014, but single family home transactions were down 57% compared to Q1-14. Transaction volumes for the communities tracked by Phidar’s House Price Index were down by half in Q1-15 compared to Q1-14, implying a shift to newer, less established projects and communities.

Phidar’s Dubai Real Estate International Demand Index (REIDI) fell significantly in the first quarter, driven primarily by currency fluctuations, indicating a very low propensity for international real estate investment into Dubai. In Q1-15, the midpoint exchange rates for all currencies included in the REIDI are down against the dollar, both QOQ and YOY, except the Pakistani Rupee and Hong Kong Dollar. This is not a measure of actual capital flows, but a real time indicator intended to assess the propensity for attracting capital inflows into Dubai real estate.

The report also explores affordable housing trends and maps out some of the challenges to address, primarily structuring and project location.

“The off plan sales model for Strata units is not a suitable capital raising strategy for affordable housing development,” said Ms. Downs. “Fragmented ownership will lead to disequilibrium, volatility and market risk,” she said.

Since the market trough in 2011, Standard quality apartments price have increased 75%. Phidar uses a four tiered scale to classify properties by quality and Standard is the most basic classification. The long term average price for Standard properties is above the affordability threshold, AED 810-910 per square foot. Although prices dip below the threshold during downturns, on average, these communities are not affordable for households with a total monthly income less than AED 15,000, the demographic with the greatest housing undersupply.

The most affordable communities included in the House Price Index, Discovery Gardens and International City, are associated with particularly high volatility, as measure by the coefficient variation.

“Households in these communities are particularly sensitive to inflationary pressures,” said Ms. Downs. “We will need to adopt new models for development, capital raising and operations to meet this challenge, ideally one that involves both the public and private sectors,” she concluded.

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